Friday, November 19, 2010

Bernanke: I Am Not Doing Quantitative Easing

During one of two speeches delivered today at the Sixth European Central Bank Central Banking Conference in Frankfurt, Germany, Federal Reserve Chairman Ben Bernanke tells us he is not doing quantitative easing:

Incidentally, in my view, the use of the term "quantitative easing" to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets.

What Bernanke is getting at here is that growth in the monetary base does not necessarily mean growth in the money supply. He clearly thinks the mechanism is broken:

Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context.

Boy, is he in for a surprise. It's clear he doesn't get that roughly a trillion of his last money pump found its way into excess reserves (and thus not into the money supply) largely because he bought huge amounts of assets (MBS) directly from the money center banks. His current operation is different. It will spread the recipients of current money printing far and wide (because the sellers are far and wide). This means, at the least, the first round will get its way into the system, thus boosting money supply. Further, I suspect banks will be much more willing to loan money out against this high powered money this time, which means the money multiplier will kick in and Bernanke will be absolutely amazed at how many helicopters he has in the air.